Suppose a firm's stock is selling for $15. It just paid a dividend, and dividends are expected to...

Question:

Suppose a firm's stock is selling for $15. It just paid a dividend, and dividends are expected to grow at 4% per year.

What is the dividend yield?

Dividend Yield

Dividend Yield is used in evaluating the business before the stock is purchased. It is used in appreciation of stocks. Dividend yield is considered as return on investments when there is no capital gains.

Answer and Explanation:

Given that Selling Price of stock, {eq}P_{0} {/eq} = $15, Growth rate in dividends, {eq}g {/eq} = 0.04

Let the current dividend by $1. The expected dividend, {eq}D_{1} {/eq} would be

{eq}Div Yield = \frac{D_{1}}{P_{0}} {/eq}

{eq}Div Yield = \frac{D_{0}(1+g)}{P_{0}} {/eq}

{eq}Div Yield = \frac{1 (1.04)}{15} {/eq}

{eq}Div Yield {/eq} = 0.0693 or 6.93%

Hence, the dividend yield is 6.93%.


Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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